FTB issues legal ruling on sourcing of gain from sale of IRC Section 751 assets

On July 14, 2022, Franchise Tax Board (FTB) issued Legal Ruling 2022-02 relating to California sourcing rules when a nonresident individual partner disposes of a partnership interest in a partnership that holds unrealized receivables or inventory (commonly referred to as "hot assets").

As set forth by Internal Revenue Code (IRC) section 751, the income or loss attributable to hot assets is calculated as if the partnership sold the hot assets and passed the partner’s share of gain or loss through to the partner. That partner’s share of IRC section 751 income or loss is treated as ordinary income from a business, trade, or profession (BTP). And ordinary income from a BTP is sourced according to California Code of Regulations, Title 18, section 17951-4.